NTES Stock Study (6-20-24)

Posted by Mark on August 3, 2024 at 07:16 | Last modified: June 21, 2024 12:47

I recently did a stock study on NetEase Inc. ADR (NTES) with a closing price of $90.63.

M* writes:

     > NetEase, which started on an internet portal service in 1997, is a
     > leading online services provider in China. Its key services include
     > online/mobile games, cloud music, media, advertising, email, live
     > streaming, online education, and e-commerce. The company develops
     > and operates some of the China’s most popular PC client and mobile
     > games, and it partners with global leading game developers, such
     > as Blizzard Entertainment and Mojang (a Microsoft subsidiary).

Over the past 10 years, this large-size company has grown sales and earnings at annualized rates of 22.1% and 16.5%, respectively. Lines are mostly up, straight, and parallel except for sales decline in ’19 and EPS declines in ’17, ’18, and ’20.

Over the past decade, PTPM leads industry averages despite falling from 46.6% (’14) to 32.9% (’23) with a last-5-year mean of 26.1%. ROE leads industry averages while ranging from 13.4% in ’20 to 34.3% in ’16 with a last-5-year mean of 19.4%. Debt-to-Capital is below industry averages despite rising from 8.1% (’14) to 14.1% (’23) with a last-5-year mean of 19.2%.

Quick Ratio is 2.4 per M* and Interest Coverage is 43.2 per alphaspread.com. M* rates the company “Standard” for Capital Allocation, describes the balance sheet as “sound,” and writes:

     > Given the business’ cash position and the cash flow generation, we
     > believe that NetEase can issue a very large amount of debt to fund
     > any potential acquisitions.

Value Line has not issued a report on the company.

With regard to sales growth:

• YF projects YOY 6.9% and 9.6% for ’24 and ’25, respectively (based on 25 analysts).
• Zacks projects YOY 5.5% and 8.2% for ’24 and ’25, respectively (3 analysts).
• CFRA projects 7.2% YOY for ’24.
• M* gives a 2-year ACE of 7.7% growth per year and projects 5-year annualized growth of 11.0% in its analyst note.

I am forecasting below the range at 5.0% per year.

• MarketWatch projects 9.4% YOY and 9.6% per year for ’25 and ’24-’26, respectively (based on 29 analysts).
• Nasdaq.com projects 11.1% YOY and 15.2% per year for ’25 and ’24-’26 [3/3/1 analyst(s) for ’24/’25/’26].
• Seeking Alpha projects 4-year annualized growth of 8.8%.
• YF projects YOY 2.1% and 9.4% for ’24 and ’25, respectively (22), along with 5-year annualized growth of 0.9%.
• Zacks projects YOY 9.8% and 11.3% for ’24 and ’25, respectively (2), along with 5-year annualized growth of 7.5%.
• CFRA projects 10.5% YOY and 12.3% per year for ’24 and ’23-’25 along with a 3-year CAGR of 12.0%.
• M* projects long-term annualized growth of 10.7%.

My 3.0% per year forecast is toward the lower end of the range (mean of four: 7.0%). Initial value is ’23 EPS of $6.40/share rather than 2024 Q1 $6.52 (annualized).

My Forecast High P/E is 19.0. Over the past decade, high P/E ranges from 18.3 in ’14 to 49.8 in ’18 with a last-5-year mean of 27.9 and a last-5-year-mean average P/E of 21.8. I am toward the lower end of the range [only ’14 and ’23 (18.6) are less].

My Forecast Low P/E is 11.0. Over the past decade, low P/E ranges from 9.8 in ’16 to 25.8 in ’18 with a last-5-year mean of 15.7. I am forecasting toward the lower end of the range [only ’16 and ’14 (10.7) are less].

My Low Stock Price Forecast (LSPF) of $70.40 is default based on initial value given above. This is 22.3% less than the previous close and 18.9% less than the 52-week low.

Over the past decade, Payout Ratio (PR) ranges from 21.1% in ’21 to 43.7% in ’19 with a last-5-year mean of 32.6%. I am forecasting below the range at 21.0%.

These inputs land NTES in the HOLD zone with a U/D ratio of 2.3. Total Annualized Return (TAR) is 10.1%.

PAR (using Forecast Average—not High—P/E) is lower than I seek in a large-size company at 5.4%. If a healthy margin of safety (MOS) anchors this study then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 14 studies (my study and 3 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 7.9%, 5.9%, 22.3, 14.9, and 32.6%.

MS high / low EPS are $8.62 / $6.39 versus my $7.41 / $6.40 (per share). My high EPS is less due to a lower growth rate.

MS LSPF of $75.00 implies a Forecast Low P/E of 11.7: lower than the above-stated 14.9. MS LSPF is 21.2% less than the default $6.39/share * 14.9 = $95.21 (INVALID on today’s date) thereby resulting in more conservative zoning. MS LSPF is 6.5% higher than mine, though.

Despite the small MS sample size, MOS seems robust in this study. My TAR (over 15.0% preferred) is less than MS 15.9%. I am toward the lower end of historical P/E ranges and long-term EPS projections. Were it not for the head-scratching YF long-term forecast, the stock may look much more attractive.

With regard to valuation, PEG is 1.6 and 4.5 per Zacks and my projected P/E, respectively: the latter significantly overvalued in part because of my low growth rate. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is very low at 0.64.

U/D has NTES a BUY under $88/share. The stock needs to approach $70 in order to meet the BI TAR criterion given a forecast high price ~$141.